Funding refers to the money required to start and run a business. It is a financial investment in a company for product development, manufacturing, expansion, sales and marketing, office spaces, and inventory. Many startups choose to not raise funding from third parties and are funded by their founders only (to prevent debts and equity dilution). However, most startups do raise funding, especially as they grow larger and scale their operations.
Startup funding is the process of raising capital to support the launch, growth, and expansion of a new business. In India, startups can secure funding through various sources, including government schemes, venture capitalists, angel investors, and crowdfunding platforms
Stages of Startup Funding
Bootstrapping (Self-Funding)
- Entrepreneurs use personal savings or revenue from initial sales.
- Ideal for early-stage startups with minimal costs.
Angel Investors
- High-net-worth individuals invest in early-stage startups.
- Examples: Indian Angel Network, Mumbai Angels, Chennai Angels.
Venture Capital (VC) Funding
- Institutional investors fund high-growth startups in exchange for equity.
- Examples: Sequoia Capital, Accel, Nexus Venture Partners.
Government Schemes & Grants
- Startup India Seed Fund Scheme (SISFS) – ₹945 Cr fund for early-stage startups.
- Fund of Funds for Startups (FFS) – ₹10,000 Cr fund managed by SIDBI.
- MSME & State Government Grants – Various state-level incentives.
Bank Loans & NBFCs
- MUDRA Loan – Offers up to ₹10 lakh for micro and small businesses.
- SIDBI Loan Schemes – Funding solutions for startups.
Incubators & Accelerators
- Provide mentorship, office space, and initial funding.
- Examples: T-Hub, NSRCEL (IIM Bangalore), CIIE (IIM Ahmedabad).
Crowdfunding
- Raising funds from the public via platforms like Ketto, Milaap, and Kickstarter.
IPO (Initial Public Offering)
- Startups list on stock exchanges to raise capital from public investors.
- Example: Zomato, Paytm, Nykaa IPOs.
Why funding is required for startups
A startup might require funding for one, a few, or all of the following purposes. It is important that an entrepreneur is clear about why they are raising funds. Founders should have a detailed financial and business plan before they approach investors.
- Prototype Creation
- Product Development
- Team Hiring
- Working Capital
- Legal and Consulting Services
- Raw Material and Equipment’s
- Licenses and Certifications
- Marketing and Sales
- Office Space and Admin Expenses
Types of Startup Funding
Working Capital | Equity Financing | Debt Financing | Grants |
|---|---|---|---|
Brief | Equity financing involves selling a portion of a company’s equity in return for capital. | Debt financing involves the borrowing of money and paying it back with interest. | A grant is an award, usually financial, given by an entity to a company to facilitate a goal or incentivise performance. |
Nature | There is no component of repayment of the invested funds. | Invested Funds to be repaid within a stipulated time frame with interest | There is no component of repayment of the invested funds |
Risk | Financer: There is no guarantee against his investment. Startup: Startups need to give up a portion of their ownership to shareholders. | Financer: The lender has no control over the business’s operations. Startup: You may need to provide a business asset as collateral. | Financer: There is a risk of the startup not meeting the goal or objective for which the grant has been provided. Startup: There is a risk of the startup not receiving a portion of the grant due to several reasons. |
Threshold of Commitment | While startups are under less pressure to adhere to a repayment timeline, investors are constantly trying to achieve growth targets. | Startups need to constantly adhere to the repayment timeline, which results in more efforts to generate cash flows to meet interest repayments. | Grants are distributed in different tranches with respect to the fulfilment of the corresponding milestone. Thus, status is constantly working to achieve the milestones laid down. |
Return to Investor | Capital growth for investors | Interest payments | No Return |
Involvement in Decisions | Equity Investors usually prefer to involve themselves in the decision-making process. | Debt Fund has very less involvement in decision-making. | No direct involvement in decision making. |
Sources | Angel Investors Self-financing Family and Friends Venture Capitalists Crowd Funding Incubators/Accelerators | Banks Non-Banking Financial Institutions Government Loan Schemes | Central Government State Governments Corporate Challenges Grant Programs of Private Entities |
What do investors look for in startups?
Objectives and Problem Solving- The offering of any startup should be differentiated to solve a unique customer problem or to meet specific customer needs. Ideas or products that are patented show high growth potential for investors.
Management and Team- The passion, experience, and skills of the founders as well as the management team to drive the company forward are equally crucial in addition to all the factors mentioned above.
Market Landscape- Market size, obtainable market share, product adoption rate, historical and forecasted market growth rates, macroeconomic drivers for the market your plans to target.
Scalability and Sustainability- Startups should showcase the potential to scale in the near future, along with a sustainable and stable business plan. They should also consider barriers to entry, imitation costs, growth rate, and expansion plans.
Customers and Suppliers- Clear identification of your buyers and suppliers. Consider customer relationships, stickiness to your product, vendor terms as well as existing vendors.
Competitive Analysis-Consider the number of players in a market, the market share, obtainable share in the near future, product mapping to highlight similarities as well as differences between different competitor offerings.
Sales and Marketing-No matter how good your product or service may be, if it does not find any end-use, it is no good. Consider things like a sales forecast, targeted audiences, product mix, conversion and retention ratio, etc.
Financial Assessment- A detailed financial business model that showcases cash inflows over the years, investments required key milestones, break-even points, and growth rates. Assumptions used at this stage should be reasonable and clearly mentioned.
Exit Avenues-A startup showcasing potential future acquirers or alliance partners becomes a valuable decision parameter for the investor. Initial public offerings, acquisitions, and subsequent rounds of funding are all examples of exit options.
Startup India Funding Support
The Government of India formed a fund of INR 10,000 crore to increase capital availability as well as to catalyse private investments and thereby accelerate the growth of the Indian startup ecosystem. The Fund was set up as a Fund of Funds for Startups (FFS), approved by the Cabinet, and established by the Department for Promotion of Industry and Internal Trade (DPIIT) in June 2016. FFS does not invest in startups directly but provides capital to SEBI-registered Alternate Investment Funds (AIFs), known as daughter funds, who in turn invest money in high-potential Indian startups. SIDBI has been given the mandate of managing the FFS through the selection of daughter funds and overseeing the disbursal of committed capital. The fund of funds makes downstream investments in venture capital and alternative investment funds that in turn invest in startups. The fund has been formed in a way that creates a catalysing effect. Funding is provided to startups across different life cycles.
As of 31st January 2024, SIDBI has committed INR 10,229 crores to 129 AIFs; further INR 4,552 crores have been distributed to 92 AIFs. A total of INR 17,452 crores has been injected to boost 939 startups.
FAQs
How to Secure Startup Funding?
✔ Create a solid business plan with financial projections.
✔ Build a Minimum Viable Product (MVP) to showcase market potential.
✔ Network with investors & incubators via startup events.
✔ Apply for government grants & loans under Startup India.
✔ Pitch to angel investors or VCs with a compelling story.
Ways to Raise Funds for Startups in India?
1. Investments from Close Network- It is easier to borrow money from family, friends, and a close network who trust you than investors or banks. They most probably invest in your startup as they believe in your dream. Getting legal advice from family and friends is a good idea if you intend to take a loan from them. The advantage of the startup funding method is you can give back the money flexibly. However, borrowing money could break the friendship and create a bad climate for the family. So, keep the promise and put your efforts into repaying the money.
2. Government Schemes- The Indian Government launched various loan schemes to benefit the start-up enterprises. It understood the importance of startups for innovation and economic growth. It keeps supporting women entrepreneurs, educated youth, individuals from the SC/ST category, villages, rural areas, etc., which boosts India’s overall economy. Various ministries and departments developed schemes to provide financial, infrastructural, and regulatory support for startup enterprises. Following are some of the schemes introduced by the Government of India.
- Smart Farm Challenge by STPI.
- Startup India Initiative.
- Dairy Entrepreneurship Development Program.
- Pradhan Mantri Mudra Yojna.
- Startup India Seed Fund.
- Digital India Bhasini.
- ASPIRE
- Startup Leadership Program.
- Chunauti.
- Qualcomm semiconductor Mentorship Program.
- Aatmanirbhar Bharat App Innovation Challenge.
- STPI
- Samridh Scheme.
- Digital India Genisis.
- Drone Shakti
3. Find an Angel Investor-Individuals who have surplus money and are interested in investing in new startups in return for equity are called Angel Investors. The major risk in getting startup funding from angel investors is that they plan to get higher returns as a profit. The popular Angel Investors in India are Ratan Tata, Kunal Shah, and Sanjay Mehta. Startup owners can establish a direct relationship with investors for funding. Though investors expect a good return on investment, they are motivated by a good business idea and proposal. So, make sure to research and validate the idea thoroughly. It must have innovative aspects and the space for profitability.
4. Venture Capitalists-Venture capitalists (VCs) play a significant role in the startup ecosystem by funding early-stage companies with high growth potential. VCs are drawn to startups that articulate clear and ambitious long-term goals, demonstrating a robust, resilient business model and a strong and competent team. VCs invest in startups expecting to secure high returns, typically made in exchange for equity. Unlike angel investors, VCs engage in long-term partnerships, aligning their success with the startups. VCs often avoid investing in a startup’s initial or later stages when the competition is high. In essence, venture capitalists contribute capital and strategic guidance for business development.
5. Bank Loans- Banks in India provide traditional loans to startups based on their creditworthiness and business plans. It provides two forms of funding for startup enterprises: loans and working capital loans. While the process can be lengthy, securing a bank loan offers stability and allows entrepreneurs to retain full ownership. However, getting loans from private or public sector banks becomes challenging if you don’t have a financial history or good credit score.
6. Startup Incubators and Accelerators-Joining an incubator or accelerator program provides startups with mentorship, resources, and networking opportunities. These programs often exchange equity for support, fostering rapid growth. It combines a communal workspace and a mentorship development centre to kickstart the startup into growth mode. They offer various value-added services like utilities, workspace, and legal assistance. Yet, the competitive nature can make entry tough, and startups might find their vision influenced by the program’s objectives.
7. Crowdfunding-Crowdfunding is a method to collect funds from multiple investors through social media sites or web-based platforms for various purposes. It includes social causes, disaster relief, charities and raising startup funds. In India, online web portals for crowdfunding are available: Indiegogo, Ketto, Milaap, GoCrowdera, Catapooolt, FundRazr, Kickstarter, GoFundMe, Fuel A Dream, and Impact Guru. This democratised startup funding model can bring validation and a diverse investor base.
8. Bootstrapping (Self-Financing)- Bootstrapping is a risk-free way to finance the startup and expand it. Entrepreneurs will rely on their savings to establish the startup. It relieves the pressure of getting paid back the money or giving equity to the other party. While it grants complete control to founders, it could limit the scale and pace of growth. On the positive side, bootstrapping fosters financial discipline and resource optimi sation.
9. Freelancing-Entrepreneurs can fund their startups by offering freelance services in their domain. This provides immediate income and allows for skill development. It will help you to gain money in the early stages of your startup. However, balancing freelancing with building a startup can be demanding, and there’s a risk of diverting focus from the core business.
10. Grants & Competitions-Participating in grants and competitions can offer non-dilutive funding and industry recognition. Winning such opportunities enhances credibility and attracts further investment. Nonetheless, the competition can be fierce, and the application process demands time and precision. And, make sure you are comfortable with the grants agreement, if there are any.
11. Strategic Partnerships-Collaborating with established companies for mutual benefit can infuse funds and resources into startups. Strategic partnerships can create new markets and technologies. Yet, aligning goals and maintaining a balance in the partnership can be challenging, requiring careful negotiation and communication.